April 19th, 2011

Kass: Today’s Broken Clock?

I’m not sure whether he actually believes what he wrote, whether he actually acts on his own recommendations or whether sounding bearish alarms at Cramer’s TheStreet.com is just his role but the more Doug Kass says, the less credible he seems to be and the less respect I have for him as a prognosticator.

I base this view on a recent piece on theStreet.com entitled “Kass: Apocalypse Here?“, Kass’s second call about the market topping out or, in his words “A week ago, I wrote a column, “Apocalypse Soon,” which outlined, in a comprehensive way, the ingredients for a market fall.” In his RealMoney Silver trading diary (also on theStreet.com) he wrote that a market correction loomed ever closer.

His reasons are a perma-bear’s litany of all the bad things wrong in the world, in financial markets and in government, including these ten:

  1. higher oil and input prices;
  2. a debased U.S. currency, lingering budget concerns and political partisanship, which could jeopardize a budgetary compromise (and resolution);
  3. screwflation of the middle class and its inevitable impact on economic growth and corporate profits;
  4. the specter of structural unemployment;
  5. the absence of a recovery in home prices;
  6. the fiscal and monetary “stabilizers” are soon to be taken off;
  7. vulnerability to consensus 2011 growth projections, corporate margins and profitability;
  8. the euro sovereign debt crisis, thought to be contained, has continued to spread;
  9. a relatively anemic recovery exposes the economic cycle to the vulnerability of more black swans (and tail risk), which are occurring with greater regularity; and
  10. investor sentiment has moved to a lopsidedly bullish extreme.

I believe Kass is a victim of the condition usually afflicting analysts who focus exclusively on business and economic fundamentals in making their investment decisions to the exclusion of market technicals, investor sentiment and momentum. Each of Kass’s ten points truly are risks, however none of the them are facts today (exception, perhaps, the failure of a recovery in home prices).

Rather than trying to figure out the likelihood of each of the above risks actually becoming a reality and, if and when they do, what their impact might be on the economy and stock prices, you should expend your effort on the likelihood of these risks becoming fact as assessed by the majority of investment money around the world yesterday, today and in the future as evidence in the hard facts of the actual trend of stock prices (click on image to enlarge):

Over the last 3 1/2 years, there have been two inverted head-and-shoulder bottoms, one at the launch of this bull market recovery and the second at the mid-point last year. The principal question on which investors should focus is whether or not the congestion the market’s has been trying to work its way through since the beginning of the year is a reversal top or merely another consolidation half-way through the “mid-term election year cycle” which will serve as a launching pad for another move higher to 1500-1550, the market’s all-time high by year-end.

To his credit Kass called the Generational Low at the depths of the Crash on March 9 when the market was at 676. However, many big name pundits live off their one, last great call (recall Elaine Garzarelli for her predicting the 1987 Crash or Joseph Granville for his bearish calls in the 1970′s, ’80′s and ’90′s).

Kass’s current call of “stated simply, get defensive” reminds us of his call. On CNBC last November 8 in “The Market Has Hit the Top” he said, “To me, there’s an artificiality of the program. We had ‘Cash for Clunkers.’ Now we have ‘Cash for Stock Market Gains.’” Since then, however, the market has risen 6.7% to yesterday’s close. The benefit those calling for a market downturn (Robert Prechter of Elliott Wave Theory comes to mind) have is that “even a broken clock is right twice a day”.

The market will eventually correct but it could be from a level 10-15% higher than when the pundits first made their calls. You can be ultra-conservative and allow to fear drive you to the sidelines now or you can try to benefit of a move higher ahead of the reversal, whenever that might come. I’ll stick to my discipline and move to the sidelines only when the market tells me its time, not when the pundits do.

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  • Anonymous

    Joe,,Cramer says that he looks at copper,containers,and retail sales for major changes in stock market cycles. Can you advise if that combo has worked over the past 30 yrs to help investors avoid bear markets ? Thanks.

  • Tom

    Kass made a good call in March 2009, but since then he's made so many wrong top-calls that his credibility has been harmed and despite his claims to the contrary, he is really starting to sound like a perma-bear. I still listen to what he says, but it's hard to give his views the same weight I used to. He seems to be great at calling bottoms though.

  • Joe

    Interesting but unverifiable. Why try to use 2nd derivative metrics like containers, copper and retail sales to predict the market? Why not go to the market itself to see how it behaves at changes in market cycles?

    I go to the market trends themselves as captured in moving averages of different time frames. I've found that over the past 50 years this metric (50-, 100-, 200- and 300-day moving averages) used in concert define turns in the market and can tell you when to step aside (i.e., move into cash) to avoid hold stocks during bear markets.

  • Anonymous

    Guru,
    Can you explain why SPX earning spike from 10 to 85 so quickly within 20 month??

    http://www.chartoftheday.com/20110408.htm?T

  • Joe

    I can't verify the accuracy of the chart but, if it is, then I would attribute the spike more to the abnormal earnings decline than to any extraordinary earnings recovery.

    The Financial Crises allowed corporations the excuse for taking all sorts of write-downs and to set up all sorts of reserves because everyone expected horrible results. And we got them. It also was the excuse for laying people off, cutting costs, etc.

    The most rapid earnings growth occurs at the earliest stages of a recovery due to intensified operating leverage; sales begin to grow and companies are still lean because very few operating costs are added yet back.

  • Joe

    I should have also mentioned Bernanke's QE I and II efforts. Tactics on this order of magnitude haven't been used before and may account for the majority of the quick recovery.

    Unfortunately, we can't predict the future and can't tell whether the recovery will regain its balance, emerge in a hyperinflation bubble or some end we can't even imagine today because it's unprecedented.